As Nonprofit Tax Breaks Vanish, Unease Appears

ByJacqueline L. Salmon

March 16, 2003

Reston Interfaith, a charity that serves low-income families in northwestern Fairfax, believed last year it had an answer -- albeit a small one -- to the county's affordable-housing crisis: Buy an apartment building in Reston that would offer below-market rents on 198 units.

The group had assumed that the $14 million housing project would be permanently exempt from property taxes, but a vote last fall by the Fairfax Board of Supervisors suspended any new tax waivers for nonprofits such as Reston Interfaith. As a result, the human services agency is looking at an annual tax bill of about $200,000 on the not-for-profit project, which would increase its operating costs considerably, said Kerrie Wilson, executive director of Reston Interfaith.

"It adds a new level to our whole funding needs," Wilson said of the agency, which is still negotiating to purchase the apartment building.

The change stems from new taxing authority that state voters gave local jurisdictions last fall. Fairfax is the only Northern Virginia jurisdiction to take advantage of the new provision.

Previously, the power to approve local real estate tax breaks resided solely with the General Assembly. Localities would recommend which properties to exempt -- defined by state law as property used for "literary, scientific . . . religious, charitable, patriotic, historical, benevolent, cultural and for public park and playground purposes" -- but state legislators had the final say.

Now that power has been transferred to city councils and county boards.

While the switch doesn't affect property already declared tax-exempt, even some unaffected local nonprofits are nervous. That's because jurisdictions nationwide have been levying new taxes and fees on nonprofits, or are considering doing so.

Baltimore tried to slap an 8 percent energy tax on its nonprofits in 2001, backing down only when large charities in the city agreed to a fee system known as Payments in Lieu of Taxes (PILOTs), which has proved popular elsewhere. District nonprofits have expressed concern that the city might launch its own PILOTs program to offset shrinking municipal revenue.

New taxes or fees "make it more expensive and difficult for nonprofits to continue their work of community service and enrichment," said Chuck Bean, executive director of the Nonprofit Roundtable of Greater Washington, which is organizing area nonprofits that oppose new fees.

Fairfax isn't the first Northern Virginia jurisdiction to reduce tax breaks for nonprofits.

Falls Church stopped recommending most such exemptions a few years ago, said Ray Spicer, director of Housing and Human Services in the city, which set up a fund to which taxed nonprofits can apply for grants. Last year, about $70,000 was given in grants, he said.

But that amount isn't sufficient to cover all the city's nonprofits.

One organization whose application was denied is PRS Inc., which offers services to the mentally ill. Wendy Gradison, the group's president and CEO, said PRS pays about $10,000 a year in property taxes. "It may not seem like much to some, but it's a lot to us," she said. "It's very unfortunate because we operate so close to the margin."

Arlington County hasn't recommended property tax breaks for most nonprofits in more than 30 years, said county spokeswoman Diana Sun. Even so, 13 percent of the county's land -- including government-owned sites such as the Pentagon and Arlington National Cemetery, as well as churches and synagogues -- is exempt from taxation.

Prince William and Loudoun counties and Alexandria grant exemptions to nonprofits on a case-by-case basis.

In Fairfax, tax relief for nonprofits adds up to millions of dollars each year. The practice sparked an outcry in 2001 when the National Wildlife Federation was granted a permanent tax break, worth about $300,000 a year, on its new, seven-acre headquarters in Reston.

Supervisors say they want to examine the tax-break policy in light of the trims in services and higher fees they are considering as part of the county's proposed $2.58 billion budget for the fiscal year that begins July 1.

"We need to take a look at the cost of that program in light of our budget. We need to see what we can afford," said Supervisor Gerald E. Connolly (D-Providence).